Moody's upgrades Covidien

Moody's Investors Service said it upgraded the senior debt ratings of Covidien International Finance SA to A3 from Baa1. Covidien International Finance is a subsidiary of Covidien plc, which was just acquired by Medtronic plc. This concludes the review that began June 16, 2014, and the outlook is negative.

The upgrade reflects Moody's opinion that Covidien's existing bondholders are moderately better off because they now receive downstream guarantees from A3-rated Medtronic but will not be required to provide upstream guarantees. However, Moody's said it is not making a rating distinction between any of the debt in Medtronic's capital structure because of the solid credit strength of the combined entity, the very low probability of default and the downstream guarantees from entities at or near the top of the corporate structure.

The agency said the negative outlook reflects challenges Medtronic will face in deleveraging, including limited free cash flow after funding shareholder commitments, the potential for additional M&A and headwinds in the health-care environment such as pricing pressure and weak hospital utilization trends.

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